The Henry Tax Review

In response to the Henry Review, the Government has announced a small number of proposals, some of which directly affect the superannuation industry.

The Government expects an employee aged 30 today, on average weekly earnings, will retire with an additional $108,000 in superannuation. The Government also expects a female aged 30 today on average weekly earnings, with an interrupted work pattern, will retire with an additional $78,000 in superannuation.

Overall, the superannuation pool is expected to benefit by $85 billion over the next decade.

Summary of Key Superannuation Proposals

Superannuation Guarantee Rate

The Superannuation Guarantee (SG) rate will rise incrementally over the next 10 years from 9% to 12% as set out in the following table:

Year

Rate (%)

2013/14

9.25

2014/15

9.50

2015/16

10.00

2016/17

10.50

2017/18

11.00

2018/19

11.50

2019/20

12.00

Superannuation Guarantee Age

The SG age will increase from 70 to 75 from 1 July 2013.

This measure will address the current inequity faced by those workers aged over 70 who do not receive SG.

Low Income Earners

From 1 July 2012, the Government will pay a contribution of up to $500 annually into the superannuation accounts of workers on adjusted taxable incomes of up to $37,000. This benefit is also extended to self employed workers.

This contribution will ensure low income earners pay no tax on SG contributions paid on salaries up to $37,000. However, the $500 payment will not be indexed.

The Government will also retain the co-contribution scheme.

Concessional Superannuation Contribution Cap for Over 50s

From 1 July 2012, workers aged 50 and over with superannuation balances of less than $500,000 will be able to make up to $50,000 in annual concessional contributions (employer contributions) taxed at the concessional rate of 15%.

Whilst disappointing the Government has not extended the $50,000 cap to all members over 50, the proposal will allow individuals to ‘catch up’ on their superannuation contributions at the stage in their lives when they are most able to do so.

However, SMSF Investor believes the $500,000 limit will be impractical to implement and will impose an administrative burden on all superannuation funds.

Summary of Other Key Proposals

Company Tax Rate

The company tax rate will reduce from 30% to 28% by 2014/15:

29% in 2013/14;
28% in 2014/15.

The Henry Review had recommended a reduction to 25% on the basis that such a reduction would encourage innovation and entrepreneurial activity.

Small Business

The company tax rate will drop to 28% for small businesses 2 years earlier than for big business, that is, in 2012/13.

Simplification of depreciation rules from July 2012:

Immediate write-off for assets up to $5,000 (up from $1,000 currently);
Small businesses will be able to group all other assets (except for buildings) in a single depreciation pool at a rate of 30%.

These depreciation measures are likely to lead to the following benefits for small business:

Increased cash flows for small business as the tax benefit from investment will be immediate instead of spread over a number of years;
Reduced compliance costs for small business as there will be less paperwork and time spent on managing asset schedules and depreciation calculations.

Resource Super Profits Tax (RSPT)

A new tax of 40% will be introduced on mining company earnings from 1 July 2012:

While RSPT has deductions and credits for corporate tax, state royalties, capital expenditure, exploration and development, estimates are the new net tax burden on miners will be higher;
To apply to all existing mineral projects, not just future projects;
Brings mining tax regime more inline with existing petroleum tax regime.

Largest impact will be on large cap, high margin producers with significant Australian assets:

For example, some market estimates assess negative value impact on BHP Billiton and Rio Tinto at 20%;
In contrast, junior explorers and companies more weighted to offshore assets will be less impacted.

Initial investor reaction appears to reflect some expectations of the mining industry being able to negotiate improved terms, however, in our view it is unlikely to have a material impact on long term foreign investment into Australia:

Despite raising cost of capital for the mining sector and increasing market perceptions of Australian sovereign risk, on a relative basis, Australia remains an attractive country for foreign mining investment;
At margin, may act as a deterrent for marginal mining projects, potentially benefitting commodity prices while hurting mining stocks.

Recommendations Ruled Out by the Government

The Government has confirmed that it will not implement changes in the following areas:

Change to negative gearing investment strategies;
Capital gains tax, specifically the main residence exemption and CGT discount will be maintained;
Increasing preservation age to align with access to the Age Pension;
Including the family home in means tests for Government support;
Abolishing the Medicare Levy;
The benefits of dividend imputation will be retained.